The first big test

Donald Trump’s first big test will be his choices for the cabinet posts.

After he offended Mexicans, the British, Muslims, the Chinese, Koreans, Europeans, and the Japanese, the person that he chooses as America’s top diplomat will need to be an accomplished professional, capable of repairing the almost irreparable damage.

That choice will tell the world whether the shock of the election justifies their concern.

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Whose fault is that?

The recovery from the great recession of 2008 has been extraordinarily slow.

Now, as more data is available, the reasons for this sluggish convalescence are becoming evident. Businesses, uncertain of what the future holds, are not investing. The piles of cash that large American and Western European businesses are now hoarding provides proof.

Interviewed executives of Western European companies have explained that uncertainty about the euro is the reason. In America it’s the “fiscal cliff”.

Recently announced statistics reveal that unemployment is now below the magical 8% figure. Two researchers from the Federal Reserve Bank of San Francisco have established that unemployment would be 1% lower, were it not for the uncertainty.

The politicians will be pointing at each other, and for once they’ll be right.

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Good or evil

Since 1973 much of world politics has been dominated by oil.

America’s dependence on oil imports is reducing, driven by the reduction in consumption, and increased production at home. American oil consumption fell from 2005 to 2010 as a result of spiking prices and recession, and it is projected to do little more than return, very slowly, to the pre-recession peak over the next two decades.

Meanwhile, America’s shale oil boom is turning the country into one of the world’s dominant energy producers (with Canada rapidly assuming a position just behind). An enormous share of the world’s oil may soon be produced in North America, in other words, potentially altering the economics and politics of oil in dramatic ways.

Fracking, a method of extracting gas from shale is a hotly debated topic. The technique, also called Induced hydraulic fracturing, involves pumping a mix of water, sand, and chemicals down the perforated still pipe and into the reservoir at ultra-high pressure to create small fractures in shale/tight formations which free up the oil and gas to flow up the well.

Hydraulic fracturing has raised environmental concerns and is challenging the adequacy of existing regulatory regimes. These concerns have included ground water contamination, risks to air quality, migration of gases and hydraulic fracturing chemicals to the surface, mishandling of waste, and the health effects of all these.

In Britain the resistance is founded on the belief that minor earthquakes had been caused by fracking that was being performed close by.

New York, Maryland and New Jersey have imposed temporary bans on fracking and Vermont may follow, but everywhere else in America the gas flows unimpeded.

Europe, with its high energy costs and its dependence on Russia for most of its gas, would benefit greatly from exploiting the shale bound reserves. Belief that the ecological risks have not been solved prevents that from happening.

Economic realities might soon force everyone to sort fact from fiction.

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Keeping it to themselves

Is Germany factoring Mediterranean Europe

Factoring is a form of finance. Until the late 20th century the industry suffered the stigma that companies resorting to factoring were heading for liquidation.

Factoring is secured financing: the factoring house purchases the borrower’s receivables, advancing 75% of the invoice value up front, and the remaining 25% when the debt is paid. The factor manages the debtors, for which it charges a fee, usually 1% of invoice value, plus interest on the advance at 7% over prime (the best rate that banks charge to risk free clients).

It’s expensive finance.

Once the factor has control of the receivables, it has control of the company’s destiny. If debtors do not pay on time, the cost of funding becomes prohibitive and eventually destroys the company.

When that happens, the fully secured factoring house converts the client’s liquidation into a handsome profit, purchasing the company’s assets at a fraction of their real worth.

In his thesis on the subject, this correspondent proposed that both parties would benefit if the factoring house used economies of scale to manage the receivables efficiently, not only preventing liquidation, but also making the company a success. The factoring house is also more profitable as it turns its facilities over faster. The client’s funding requirements are reduced, minimizing the interest costs.

The factoring house that employed the young author proved the theory in practice.

Today, the Mediterranean countries are in financial distress. Greece is insolvent. Spain and Italy’s banks are in trouble, with both countries badly indebted. Spain is running deficits. Italy’s industries are no longer competitive.

Early in the crises a German tabloid suggested a solution to Greece’s crises: “Sell us your islands”.

The band-aid solutions that have been used so far provide secured loans to the three countries at high interest rates. The conditions of the loans demand austerity, to remedy the profligacy that precipitated each country’s crises. As the inflicted measures bite, their economies contract, reducing tax revenues, and making repayment of the loans and interest increasingly difficult. The accusations of profligacy are legitimate, but austerity is not the answer.

The solution is to create a European banking union, with a Europe-wide bank-deposit insurance scheme. A ‘fiscal union’ in which all or part of the national debts are mutualised as joint Eurobonds would stop markets pushing sovereigns into insolvency, and would create a European asset that banks could hold. Moreover, if these were financed through federal taxes Eurobonds would be even more of a safe asset.

The ECB should be given independence from the politicians to provide the kind of solutions that the Fed and the Bank of England provide to their respective economies.

The most recent Eurozone deal is another band-aid. Instead of lending money to the country, loans will be made to their troubled banks. While this is an improvement over previous arrangements, it’s not a real solution.

Germany’s resistance to Eurobonds and a fiscal union has financial logic. At present the country’s most recent bonds are offering a yield close to zero. That makes it very cheap for Germany to borrow money. And while the Euro looks at risk, instead of rising, the exchange rate remains low, offering Germany’s products to the world at a discount. As the world’s second biggest exporter, the German manufacturers are enjoying the windfall.

Apparently the German constitution prohibits a Euro fiscal union and Eurobonds. If the country’s leaders wanted to pursue that course, they could be promoting the necessary constitutional amendments. Angela Merkel has said “over my dead body”.

Should the Mediterranean countries fail, those islands and beaches, with the houses overlooking them could be on sale at a big discount to those with the money.

Whether it’s intent, or bad judgement, it will still be the same. The rich get rich and the poor get………. austerity.

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EUROPEAN COUNCIL Brussels, 29 June 2012
Babies and bathwater
Europe on the rack

A glimmer of hope!

After reading a recent blog it seems that the European authorities have a plan. They have produced a report that includes:

  • The eurozone borrowing money collectively “could be explored”
  • A European treasury office to be set up to control a central budget and keep an eye on national ones
  • A single European banking regulator and a common scheme guaranteeing bank deposits
  • Common policies on employment regulations and levels of taxation

The wording is diplomatic. It will move much of the financial decision making to Brussels, and in principle is a good solution. That it’s being proposed by the Eurogroup’s Herman Van Rompuy and Jose Manuel Barroso, whose powers will grow exponentially, if the plan is adopted, may bring it’s motives into question and is something that the politicians will sieze on.

You can be sure that of the politicians, whose powers will be similarly diminished, will not raise that as the issue. Their contention will be that it is “an encroachment on our sovereignty”.

Hamilton predicted much of this over two hundred years ago.

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EU unveils its vision for the future of monetary union